Fuel, fertilizer price, supply now uncertain

As consumers try to deal with natural gas bills nearly triple what they were last year, farmers are bracing for another shock - the potential for paying $400 per ton for nitrogen fertilizer this spring.

With planting still two months away, farmers are being quoted prices anywhere from $250 to $400 per ton for ammonium nitrate. Some analysts are holding out hope that supplies will improve and prices dip before April. Others aren't so sure.

"There are rampant rumors and emotion out among farmers right now," The Fertilizer Institutes' Ron Phillips says. "Over the last year, natural gas prices have gone from around $2.25 to over $10 (per British thermal unit or Btu). Lately, prices have dropped back down to around $7."

Natural gas is a major cost component of making ammonia. Ammonia is a directly applied product for farmers and is also the basis for making all other nitrogen products.

"The cost of natural gas is the biggest influence in nitrogen fertilizer costs. When the price of natural gas goes up by a factor of four, consequently the cost of production rises," says Phillips.

What has happened as a result of the explosion in costs is a lot of the country's capacity to make nitrogen has been idled.

"That's because you can't make nitrogen fertilizer with $8 gas. There's no money in that. What we're seeing is nitrogen producers being caught in a squeeze between high input prices and cost of production that, at times, has exceeded the cost of the products in the marketplace," says Phillips.

Typically, there's two times during the year that fertilizer is in high demand. Spring planting is by far the highest demand time followed by fall.

"A good portion of our time during the early part of the year - like now - is spent trying to build inventory. The pipeline needs to be filled to meet the incredible demand we have during the spring-time," says Phillips.

Obviously, with a large portion of capacity idled, inventories have been reduced and worries abound. People want to know if fertilizer will be available come planting season.

Another factor that's developed is as capacity has idled, imports have risen dramatically in the United States, which buys nitrogen from a variety of countries. Phillips and others say there should be record nitrogen imports this year.

There's a long-term issue here, says Phillips. Basic demand for natural gas has increased dramatically in the country. Supply hasn't kept up. "There's a continuing problem of supply and demand in the natural gas market. Most analysts are predicting that even after the winter, the prices won't go back to the low levels they once were."

Did the fertilizer manufacturers see this coming? "We had no indication that this would occur. We follow industry forecasts like everyone else. There was nothing that indicated to us that this incredible 69 percent increase in natural gas prices would happen," says Melinda Hood, Mississippi Chemical Corp.'s communications manager.

"We've reduced capital expenditures, we've reduced the work force, reduced production, we're selling non-core assets. We also sold our natural gas futures positions in December to create more cash.

"We're making no future predictions. This is a highly volatile market we're operating in. Product prices are actually improving in recent weeks but we're not making any major moves one way or the other," says Hood.

Instead, the company is making decisions on a daily basis.

"We must evaluate the costs- natural gas costs account for 70 to 80 percent of the cost of making nitrogen fertilizer," she said. "We look at gas prices, product prices and customer needs. We balance those three and make decisions for the day. This is very different from what we normally do. We usually have longer-range goals and strategies. But we're forced to do this now: intense hands-on management of the plant."

Hood says Mississippi Chemical saw an increase in natural gas prices last winter. But there was no indication that prices would hit such heights. "I can remember having conversations with people about how astronomically high the price of gas was when it was $3.80," she said.

"What's most important for us is the company makes decisions with the customer in mind. A lot of this is economical by necessity, but we've bought product on the open market to satisfy customer need. If it was too expensive to make ourselves, we went ahead and bought it on the open market to meet demand."

Don Johnson, agronomist, consultant and former employee in the fertilizer industry for many years, says several things have converged to bring nitrogen prices up.

Last year, crude oil was going for $36 per barrel. That caused a lot of switching from fuel oil to natural gas. That, in turn, lead to a shortfall of natural gas.

"Gas leapt from $2.20 to over $10," he noted. "If you weren't hedging on natural gas, you were in a heap of trouble. Some fertilizer manufacturers that had a position on gas had bought at $3. When it hit $10, they sold their stock."

That drew some criticism among farmers, but you can't really blame the companies for doing it, says Johnson.

"Say a farmer had a bunch of corn in the bin, and the plan was to buy feeder cattle and use the corn on them. Before the cattle are bought, though, corn prices jumped from $2 to $10. Every farmer would sell the corn because it's good business."

Last year in Nebraska - where Johnson resides - anhydrous ammonia cost about $220 to $230 per ton. Right now, you'll find quotes of around $420 per ton, says Johnson.

"It takes almost 34 million Btu to produce 1 ton of anhydrous ammonia. Essentially, at $2.20 gas, it cost about $100 per ton to produce anhydrous ammonia. When the cost is $8 for gas, you're talking about gas costing over $300 per ton."

Johnson thinks the current price situation is probably temporary.

"Everyone was complacent and not paying enough attention to the new power plants coming on line. Most of the new power plants built since 1995 are on natural gas. That's new. Before that, probably 50 percent of our electric power plants came from coal. Another 15 to 20 percent use nuclear energy."

What's odd, says Johnson, "is we lost nitrogen plants last year because the cost of fertilizer was so low. Some of the plants grew obsolete and weren't needed. Then, when the price of natural gas surged in the last few months, more plants shut down because it wasn't profitable to manufacture nitrogen."

How much nitrogen do farmers actually need? "Manufacturers are asking that, but so should farmers. I spoke with several specialists who say some farmers may be using up to 20 percent more nitrogen than they really need to produce a good crop. Now would be a time for farmers to re-evaluate their use and go with the conservative side of recommendations."

Johnson says industry contacts he knows are saying that by Feb. 1, nearly all nitrogen plants will be back up and running. Two weeks ago that belief wasn't there.

"Historically, when nitrogen prices were pretty high, it tended to attract a supply foreign countries. Everyone loves the U.S. dollar. Normally that material arrives pretty late, though. It takes a while for folks overseas to load the boats. It usually shows up in April or May. I know that's too late for many in the South.

"The point is, if you look at the history of this, I'd bet the supply of nitrogen will become more plentiful and there will be price relief as summer nears."